Motley Fool: March 31, 2012

Posted: March 30, 2012 - 11:43pm

Motley Fool

Ask the Fool

Book ‘Em

Q: What’s a company’s book value? — K.G., Ocala

A: Book value is an accounting concept, reflecting a company’s value according to its balance sheet. To get it, you start with the total assets and then subtract intangible assets (such as goodwill, patents and trademarks) and total liabilities.

Book value is used to approximate a company’s intrinsic value, as most assets, such as factories and land, were capital-intensive and appeared on the balance sheet. But as America’s economy is becoming more service-oriented, book value has become less relevant for investors.

Consider Amazon.com (a Fool newsletter recommendation). Its book value was recently about $7.8 billion, far from its $84 billion market value. Much of Amazon’s value stems from assets and competitive advantages that don’t register significantly on the balance sheet: intellectual property, employees, a strong brand and market share.

As another example, imagine a firm that owns a lot of land and many buildings. Over the years, the value of buildings on the balance sheet is depreciated, eventually to zero. But these assets are rarely worthless and can even appreciate in value over time. Such a company might actually be worth much more than its book value.

With many companies, you’d do well to largely ignore book value.

Q: How are stockbrokers paid? — J.P., Worcester, Mass.

A: They’re generally paid by salary, commissions on sales or a mix of both, depending on the company they work for. Those who depend heavily on commissions can end up actively (and needlessly) generating trades in your account. That’s called “churning,” and it can cost you. We’d rather see brokers paid flat salaries, with bonuses for results that outperform the market averages.

Learn more at sec.gov/investor/brokers.htm and broker.fool.com.

Fool’s School

CEO Pay Defies Gravity

“What goes up must come down.”

Yet CEO pay doesn’t appear to be subject to the same laws of physics that govern the rest of the rational world.

In fiscal 2010, total realized compensation of CEOs in the S&P 500 rose by a median 36.5 percent. GMI, the leading independent provider of corporate governance ratings and research, has released its ninth annual CEO Pay Survey for 2011, noting also that extra perks awarded to S&P 500 leaders rose 11 percent in 2010.

Interestingly, of the 10 highest-paid CEOs of 2010 (who received tens or hundreds of millions of dollars apiece), four were actually retired or terminated CEOs who received golden exit packages.

So much for pay that’s commensurate with performance. These executives enjoyed a huge payout even though they won’t offer these companies or their shareholders much in the way of future performance.

When you get proxy ballots in the mail for the companies you’re invested in, let management know that CEO pay disconnected from performance (or reason) is no longer business as usual.

My Dumbest Investment

Healthy Lessons

One of my dumbest investments was a health care company that ended up trading for close to a dollar per share. I learned several lessons: (1) Beware of companies with only one hit product; (2) Beware especially of bullish CEOs projecting future profits and hoping for new acquisitions because the one-hit product just isn’t happening; (3) Be careful with the health care industry. — F.E., Singapore

The Fool responds: Those are good lessons. The health care industry actually has a lot going for it, because the world’s population is growing and getting older and will need more medical attention.

But it’s also true that companies with only one product can be particularly risky, as that product can be eclipsed by a competitor’s offering. Biotechnology companies can be especially risky, since they spend a lot of time and money developing treatments that might or might not make it to market — and even then they may not sell well.

When it comes to CEOs, they often want to make their company look good. Finding a CEO discussing risks and mistakes is a relatively rare and wonderful thing.

Foolish Trivia

Name That Company

I trace my history to a small dry-goods business in San Francisco in 1853, founded by a Jewish-German immigrant whose name I bear. In 1873, I patented rivets for men’s pants and created the planet’s first blue jeans. U.S. soldiers in World War II helped popularize my jeans and jackets overseas. Today I’m a top global-branded apparel company. My brands include the Dockers, Signature and dENiZEN names, and my own. I’m known for fairness to my employees and generosity to my community, and I’ve won many awards. I rake in close to $5 billion annually. Who am I?

Last Week’s Trivia Answer

I trace my roots back to two companies in the 1860s. One was founded by a Swiss pharmacist who developed a nutritious cow’s-milk formula for babies whose mothers couldn’t breast-feed. The other was the Anglo-Swiss Condensed Milk Co., founded by two Americans. Over time I gobbled up other companies and became a leader in milk chocolate, bouillon, powdered soups and more. Today I’m a Switzerland-based food giant, raking in billions and recently employing more than 300,000 people worldwide. My brands include Gerber, Dreyer’s, Stouffer’s, Lean Cuisine, Maggi, Coffee-mate, Carnation, Purina, Friskies, Beneful and KitKat. Who am I? (Answer: Nestle)

The Motley Fool Take

Las Vegas Sands Shines On

The Chinese region of Macau has been helping Las Vegas Sands Corp. (NYSE: LVS) and other casino companies multiply their profits. Sands’ Macau casino revenue growth dropped some, to 42 percent, in 2011, but its overall prospects seem bright. The company was near bankruptcy three years ago, but now has just initiated a dividend of $1 per share.

Thriving Asian destinations such as Macau and Singapore contributed most of Sands’ revenue, with Macau fourth-quarter casino revenue rising 20 percent over year-ago levels and Singapore 44 percent. Even Las Vegas, which has been fairly stagnant, delivered a 9 percent increase.

Increasing disposable income of urban Chinese people and better tourism facilities are expected to continue nourishing the gambling market in Macau. Sands has almost captured a fifth of Macau’s gaming market already, and in April it opens its largest resort development there, Sands Cotai Central. It also plans to build a 4,000-room theme casino in Macau with separate towers for the masses and high rollers. Sands has a distinct edge over its competitors there, as it already owns the land and is merely awaiting the Chinese government’s permission to start construction.

Sands also aims to expand further in Singapore and to markets such as Japan, Korea, Taiwan, Vietnam and India. The stock may be a gamble, but it’s a promising one over the long term.